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Retiring on CDs Not Viable

The days when anyone, besides royalty and oil barons, could live off of the interest from certificates of deposit are gone. Today's low CD rates and rates on other savings vehicles could cause retirees to run out of money before they run out of life.

Not only is it not possible to simply collect interest on savings, retirees can no longer withdraw from their portfolios at the rate that was previously believed to be safe.

The old rule of thumb that allowed retirees to withdraw 4 percent of their savings per year should be thrown out the window in today's low-yield world, a study released in January found. Using the traditional 4 percent withdrawal rate, portfolios will run dry at a higher rate than ever before, found researchers Michael Finke, Certified Financial Planner professional; Wade D. Pfau, Certified Financial Analyst; and David Blanchett, CFA and CFP. Based on the real yields offered on five-year Treasury Inflation Protected Securities as of January 2013, the failure rate for retirement account withdrawals, or when they run out of money, using a 4 percent per year schedule is as high as 57 percent.

The original study that arrived at the 4 percent withdrawal rate was done by William Bengen and was based on a real return on bonds of 2.6 percent. The asset-allocation mix necessary to successfully draw down a portfolio in Bengen's study required that a portfolio devote at least 50 percent to stocks.

The study released this year used a 50-50 allocation between stocks and bonds and concluded that under current market conditions, "Even a 3 percent withdrawal rate has a more than 20 percent failure rate for all asset allocations," according to the paper, "The 4 percent rule is not safe in a low-yield world."

Even more troubling, the authors of the 2013 study contend that there is no guarantee that bond yields will bounce back to the historical mean any time soon.

That means that for today and the foreseeable future, relying exclusively on CDs and other very safe vehicles for retirement is not an option. What's surprising to me is that it may be a very long time before Americans can feel safe in retirement without purchasing a guaranteed income product. Is this going to be the age of annuities?